Mounting World Crisis

About the Author

This lecture was held at The Heritage Foundation on October
6, 1998.

I visited Moscow in mid-July, and although I saw some signs of
the impending doom at that time, I was there before the devaluation
of the ruble. However, what I saw then and what I have seen since
is an economy in free fall. The stock market has all but
disappeared. The ruble, which has been devalued since August 17,
has lost as much as 80 percent of its value in real terms. There is
a debt moratorium. Banks have collapsed; some of them have been
nationalized. The designated Prime Minister, Viktor Chernomyrdin,
has called for what he terms an "economic dictatorship" to collect
taxes. He has promised more nationalization of industries and
re-inflating the economy. Many people believe these measures will
be a sure cause of the return of high inflation in Russia.

While I was in Moscow, I spoke with a
number of economists about what is causing this crisis. There seems
to be any number of culprits. The first is budgetary. Despite all
the promises of reform, the Russian government failed to curb its
spending. This has caused mounting deficits and debt. Sixty-one
percent of the federal budget in Russia was being paid on interest
on the debt. Early this year the government deficit exceeded 7
percent of gross domestic product (GDP). Since the Soviet Union
collapsed, Russia has added $51 billion to its foreign debt. This
was largely because its government refused to curb spending. This
situation is unsustainable. One of Russia's prominent economists,
Andrei Illarionov, predicts that default on Russia's foreign loans
is practically unavoidable.

A
second culprit is the currency crisis. Currency reserves in the
central reserve bank were rapidly depleted despite the influx of
foreign capital in 1997. Many people do not seem to realize that
1997 was a good year for the influx of foreign capital into Russia.
The problem was that the rise of foreign capital was not producing
a concomitant rise in reserves in Russia's Central Bank.

The
Central Bank began depleting its reserves for a number of reasons.
One, to keep the value of the ruble artificially high. Reserves
were used to support the federal budget and to try to reduce the
deficit. Reserves also were used to subsidize imports. And there
have been accusations that some of the money in the Central Bank
disappeared because of corrupt practices.

In
sum, Russia's fiscal and currency crisis was caused by the failure
to get the budget under control; a decision to prop the ruble up to
artificially high levels; the negative impact of the economic
crisis in Asia; and the drop in oil prices in 1997 and 1998 by 30
percent that caused the crunch that led to the current economic
meltdown.

Who
is to blame for the crisis? Three Russian officials and two
institutions. Most at fault are President Boris Yeltsin and former
Prime Ministers Viktor Chernomyrdin and Sergei Kiriyenko. They
refused to cut spending or restructure the economy. They maintained
a punitively high tax system that caused massive tax evasion. And
they relied on their oligarch banker friends to create a virtual
economy that encouraged corruption.

Some
people, of course, think the culprit is too much capitalism, or the
West's forcing a free-market system on Russia. These accusations
are misplaced. Russia has an oligarchic capitalist system or a
crony capitalist system. It has been named many things, but it is
not by Western standards a free market. There always has been heavy
state intervention in Russia's economy and, despite privatization,
there was an overly cozy relationship between the oligarchs who
owned the newly privatized industries and the government. For this
state of affairs, President Yeltsin and his administration cannot
escape blame.

An
institutional culprit is Russia's Central Bank. It wasted valuable
currency reserves by trying to prop up the weak ruble. This was the
proximate cause for the devaluation of the ruble.

Another institutional culprit is the
International Monetary Fund (IMF). The IMF made the crisis worse by
not providing the proper incentives for reform. Russia made
repeated promises of reform and budgetary constraint but, despite
its failures to comply with IMF conditions, the IMF funneled
billions of dollars into Russia. In the July 13 package promising
$22 billion, Russia pledged expressly to avoid devaluation and to
promote reform. However, neither promise was kept. To me, this
seems quite a serious failure.

The
IMF gave Yeltsin's failed policies a legitimacy they did not
deserve, and it got the opposite of what it intended because its
funds covered the costs of not reforming. They anesthetized the
pain that would have resulted if Russia had instituted the
necessary reforms. As a result, the underlying disease in Russia
continued to worsen to the point at which it now has practically
killed the patient.

In
this sense, given the fact that President Bill Clinton supported
the IMF so strongly over the years, he, too, must share some blame
for Russia's crisis. Clinton was never very tough on Yeltsin. He
never gave him the tough medicine he needed. When the reforms did
not come, the money and the supportive rhetoric continued as though
nothing had happened. Clinton's support for the IMF loans to Russia
became a sort of surrogate Russia policy for his Administration. It
enabled his Administration to hide behind slogans of supporting
democracy and capitalism in Russia while Russia continued to
deteriorate economically.

This
blind support also had an unfortunate side-effect on U.S. foreign
policy overall. President Clinton bent over backward to tolerate
Foreign Minister Evgeny Primakov's increasingly anti-Western
foreign policy. There were difficulties with Russia over Iraq.
There were difficulties over Iran. Russia's support for
proliferation continued unabated. There was even the instance in
which Yeltsin likened U.S. retaliation against the terrorist
bombings in Africa to terrorism itself.

These are not the kinds of statements or
policies you would expect from a country or a leader who is a
friend of the United States. If the idea behind support for Yeltsin
and IMF aid was to encourage Russian foreign policy to become more
pro-Western and more pro-American, I am afraid it has not
worked.

The
greatest tragedy of all is that market economies have been
discredited by both Yeltsin and the IMF. When I was in Russia last
July, I talked about the rule of law and real privatization, but I
was countered with, "These are mere slogans. They don't mean
anything anymore to us Russians because we've heard President
Yeltsin and successive Prime Ministers use these slogans. They
don't work. So be done with your Western advice." The tragedy is
that pseudo-reforms have discredited the real thing.

It
may be that things have to get worse in Russia before they get
better. The situation politically in Russia right now is not ripe
for doing the right thing. Russia's political clock needs to be
reset in some way. We hope at some point something will
fundamentally change and the political situation in Russia will
improve. Perhaps, if things get worse, Russians will be forced to
adopt a true market economy and real democracy as the only viable
alternatives.

How
have President Clinton's scandals contributed to the crisis? I
think that the main contours of Clinton's Russia policy existed
before the scandal. I do not think you can say, therefore, that the
White House scandal in any way caused the failures of U.S. policy
toward Russia. However, I do think that the distractions of the
President may have contributed to his failure to think seriously
about charting a new course when evidence was mounting that the old
policy was not working.

There were signs of serious problems in
Russia late last year, but they were ignored. Therefore, it is
probably a combination of prejudice and distraction. A President
more engaged should have been asking tougher questions of his
advisers. A more attentive President surely would have seen this
crisis coming and would have been more prepared. I think that
surely, at the very least, the September summit should have
triggered a fundamental review of U.S. policy toward Russia. The
fact that it did not shows that the summit was intended mainly as a
photo opportunity.

How
can Clinton cope if impeachment proceedings get under way? I simply
cannot imagine that he would not be distracted to the point at
which his ability to lead the country is affected. If Russia
defaults on its foreign loans or suspends democracy, or if violence
breaks out, this will cause a huge international crisis. For one
thing, it will send shock waves through Europe and its markets.
This will, in turn, affect us as well as our markets. But the
President has shown no sign so far of understanding how serious the
crisis may be.

There is also the question of credibility.
When I was in Moscow in July, quite frankly many Russians were
ridiculing the United States and the President because of the
scandal. It is quite an embarrassing situation. If things get very
tough, the question will naturally arise as to whether any of
Clinton's words or his policies will be taken seriously in
Russia.

I
think it is fair to say today that we are facing a global economic
crisis potentially as large as the one we faced during the oil
crisis of the 1970s. There are very prominent voices in the
economic policy community who are suggesting that this has the
early contours of a global crisis as large as that faced by the
industrialized world at least in 1931.

This
is a time, however, to step back from radical rhetoric with respect
to our global woes. It's time to make an assessment of what is
happening on the ground, and what the United States can do to shape
events through its rhetoric and through its public policy over the
next 18 months.

We
are truly at a critical juncture economically, which presents
important political and market dangers. As you know, this juncture
was created by the Asian financial crisis, and much of the Asian
financial crisis stems from the growing pains we have seen time and
time again in emerging and developing economies. One way to view
the Asian crisis is to imagine a child's teeter-totter. On one side
sits an athletic, efficient management sector that is stranded in
mid-air by the weight of a flabby, inefficient financial sector.
The United States went through these growing pains, as has Great
Britain.

At a
deeper level, however, the financial crisis in Asia stems from
truly abysmal banking practices, incredible leverage ratios, and
policies on the part of banks that supported unsustainable loans.
We now know that the non-reporting, non-performing loans in Japan
are not of half a trillion dollars, but of a full trillion dollars.
Throughout Asia--particularly South Korea, Malaysia, Thailand, and
the Philippines--similar ratios exist. We also know that when the
assault on key Asian currencies began in early 1997, that real
estate "bubbles" and bubbles in other parts of the economy
sustained by bad banking practices began to burst. Financial
markets began to find whatever value in hidden places could be
found. Currencies collapsed. We had a payment problem as a result
of the collapse in currencies, which led to significant
contractions in the Asian economies.

It
is important for us to recognize that markets are working fairly
well in assessing the problem, balancing it, and finding
sustainable investments to burst this bubble in an orderly fashion.
That is, I think, a very important bottom line of this crisis. The
Asian financial crisis has reduced demand in Asia for exports from
the United States and Europe. It has significantly reduced the
ability of Asian economies to export their own products to the rest
of the world. Asia emerged during the 1980s as such an important
part of the global economy; now, there is a contraction of that
global economy, which raises considerable concerns on the part of
economists and policy analysts around the world. How large is that
contraction?

Take
a look at the IMF's economic forecasts produced in May 1997 and May
1998. To what extent had the IMF's economic forecasting unit
captured the crisis? In May 1997, the IMF forecast for calendar
year 1998 a growth in Japan's GDP of 2.9 percent, a handsome
expansion for any economy currently facing the crisis in Asia. By
May 1998, IMF economists refused to make a forecast, and there is a
very significant dash in that particular cell of their report. I
take that dash to indicate they were uncertain as to whether the
economy would continue to grow at a small rate or contract at a
small rate.

We
know, however, that by May 1998 the Japanese economy was already in
recession. We did not know that the recession was as deep as it is
now turning out to be. In May 1997, the Korean economy was expected
by the IMF to grow at a rate of 6.3 percent. That is a positive
rate of 6.3 percent. By May 1998, the IMF economists had recognized
the recession, but said that the economy in Korea would contract by
only eight-tenths of 1.0 percent. We know that the contraction now
in Korea is more like 7 percent or 8 percent for 1998, and it will
continue through 1999 and the year 2000.

We
have some recent forecasts by J. P. Morgan--which are achieving
support among a growing number of economists--of what's happening
now in Asia. For example, J. P. Morgan sees the contraction in
Japan this year reaching somewhere in the neighborhood of about 3
percent. In Russia, they are looking at a contraction of 6 percent
this year and 7 percent next year. And this contraction in all of
the principal Eurasian economies is beginning to spread to the rest
of the world.

The
fourth point I would like to make is that the anchor of the global
economy remains the U.S. economy. To the extent that the U.S.
economy can continue to grow, we have some hope of making this a
transitional moment in world economic development as opposed to a
moment of true crisis.

The
problems in Asia and in Russia and other parts of the world, like
Central and South America, are beginning to affect the U.S.
economy. We now have had five months of fairly stagnant industrial
production. The purchasing manager's index, which is a very good
indicator of the future expectations of the U.S. manufacturing
sector, has been in decline for the past three months. Consumer
confidence is bouncing around--a little bit of growth here, a
little bit of decline there. Our own forecasts at The Heritage
Foundation indicate that, if the crisis in Asia continues at its
current pace and a devaluation of the Chinese currency occurs, the
U.S. economy will lose about 50 percent of expected growth next
year.

A
broad assortment of economic forecasters, from DRI McGraw-Hill and
Wharton Econometric Forecasting Associates to those in banking and
investment houses, share Heritage's views. In other words, our
growth rate will drop from about 3 percent to about 1.5 percent if
the Asian crisis worsens. If that happens, we will lose about 1.6
million potential jobs next year--jobs that should have been
created but won't be. Our export and import imbalance will worsen.
And this anchor to the world economy will become less of a certain
thing.

What's happening in the United States is
happening in Latin America and Canada, too. The United Kingdom is
expected next year to grow at less than 1.0 percent. Canada is
expected to grow near 1.0 percent. Mexico and Latin America are
also badly affected by the Asian crisis.

Given the severity of this moment and the
pivotal importance for global growth, what can President Clinton
do? How are his current problems constraining the ability to
act?

The
good news is that, so far as we know, the Chairman of the Federal
Reserve, Alan Greenspan, is not part of the presidential crisis.
Thus, we will have leadership in the United States in handling this
global crisis. The emergence of a stable Federal Reserve Board
under good guidance by Chairman Greenspan is very important in
assessing the ability of the United States to make correct and
prudent moves to encourage stability or to discourage panic. But
the President plays an important role no matter how strong the
Chairman or the Board is. The President's problems, no doubt, have
been factored into the world stock markets. I spoke last night with
a Washington, D.C., stockbroker who argued that maybe as much as 60
percent of that big collapse that we had last week in the stock
market was simply discounting, now, for the President's problems,
and that this set of problems has been fully "priced in" to stock
values.

What
if the problems get worse? If there are fluctuations in foreign
markets due to uncertainty as to what the United States will do,
much of that uncertainty can be laid at President Clinton's door. I
am particularly worried about our lost leverage with Japan. The key
to recovery in Asia is not only prudent moves by the troubled
economies of Korea, the Philippines, and Indonesia, but the ability
of Japan to design good public policies that allow the market to
work and an evaluation of assets to be properly made.

The
United States has played an important advisory role in the past 10
years with respect to Japan. I am sorry to say that I think the
President's problems will undermine some of that leverage, and that
leverage at this critical moment may not be present--and, indeed,
may not be present for some time. Obviously, if we cannot leverage
the leadership of the United States--if we cannot be in a position
to lead--that simply further aggravates uncertainty in equity and
commodity markets.

We
are faced with not only a collapse in demand in Asia for our
products and a slowing of output and economic growth in most
industrialized countries, we also are faced with the very real
prospect of deflation due primarily to the falling price of oil. It
would be nice to face deflation all by itself and to be able to
work through that problem, but facing deflation when we're looking
to an economic collapse raises significant challenges for the
United States.

Finally, you know that the Clinton
Administration has recognized for some time the problems like bad
banking practices in Asia. This is not new knowledge. This didn't
suddenly become discovered truth. The failure of this government to
act like Teddy Roosevelt--to stand up in the "bully pulpit" and to
pound away at one potential cause of the economic crisis--is a
failure to act that can never be recovered. Well, some of it
probably could be if President Clinton had that credibility and
strength of character to stand up now and do that. But this
President's credibility is deeply weakened.

To
sum up, this is a particularly bad time for President Clinton's
political crisis to occur, from a global economic standpoint. It is
a very bad time indeed. We have not seen the bottom. Global growth
is likely to slow more next year than it otherwise would have done
because of an absence of leadership in the United States. The
President needs to be heard but, more important, I think Congress
needs to make a move. If those two things can happen--if Congress
effectively completes its business on the presidential crisis and
the President's leadership is restored--then a serious contraction
on the world economic scene might be avoided.

--William
W. Beachis John M. Olin Senior Fellow in
Economics and Director of the Center for Data Analysis at The
Heritage Foundation.

NEW TERRORIST THREATS
By James H. Anderson, Ph.D.

For
many years, the conventional wisdom held that terrorists wanted
many people watching, not necessarily many people dead. The nerve
gas attack in Tokyo's subway system and the bombings of New York
City's World Trade Center, Oklahoma's federal building, and the
Khobar Towers complex in Saudi Arabia that housed U.S. troops--and
more recently the bombing of U.S. embassies in Africa--shattered
the conventional wisdom. Clearly, some terrorist groups believe the
only way to attract a mass audience in a world awash with low-level
violence is to seek mass casualties.

This
trend toward super-violence may include even the use of weapons of
mass destruction--chemical, biological, and possibly even nuclear
devices--on American soil. Unfortunately, the Clinton
Administration is not particularly well-prepared to cope with
existing and emerging threats, even apart from the President's
diminished standing.

The
counterterrorism bureaucracy is still too unwieldy. The
counterterrorism architecture includes more than 40 federal
agencies, bureaus, and offices. This creates monumental
coordination problems and turf battles. A major bioterrorism
simulation exercise conducted last March revealed serious problems.
Streamlining and clarifying lines of responsibility will help, but
such efforts will not be enough.

We
are psychologically unprepared to wage a sustained campaign against
international terrorism. It is easy to declare war on terrorism;
following through with effective action is another story. The
Clinton Administration has done little to educate the American
people about emerging terrorist threats, what is needed to fight a
sustained campaign (as opposed to one that is waged sporadically),
and what the costs will be.

We
are ill-equipped to wage a campaign against international
terrorists. Fancy satellites can help in the battle against
terrorism, but what we need are low-tech and even no-tech skills
and capabilities--namely, human intelligence and paramilitary
capabilities. After a revival of sorts in the 1980s, these have
atrophied. There does not seem to be an urgency on the part of the
Clinton Administration to restore them.

The
terrorist danger we face involves not only the potential loss of
innocent life and property, but also this: Without a coherent
strategy to counter terrorists, there will be increased pressure to
retreat from the world. Some isolationists argue the best way to
confront terrorism is to lower, in turtle-like fashion, our profile
abroad. I believe this approach would be self-defeating in the long
run. It would undermine the standing of the United States abroad
and, in effect, reward terrorists.

What, then, should we do? The aim should
be to put terrorists on the defensive whenever and wherever
possible. In other words, a more forward-leaning strategy is
necessary. Thus far, the emphasis has been too much on reacting.
Our embassies overseas look more and more like ancient fortresses.
Obviously, prudent measures must be taken to protect them against
possible attack. But the best way to protect our troops and
diplomats abroad is to disrupt terrorist attacks before they occur.
The United States should not wait around for an exiled Saudi
millionaire to act. This is not a game of chess in which players
alternate moves in a gentlemanly fashion. Relentless pressure, not
sporadic attention, is necessary.

An
effective strategy will include four elements. The first element is
a comprehensive effort to educate our people and allies about the
terrorist dangers. When was the last time one of the Clinton
Administration's big guns--the Secretary of State, Secretary of
Defense, or Chairman of the Joint Chiefs of Staff--made a memorable
speech about terrorism? They need to spell out what our
counterterrorism strategy is, the risk it involves, and our
objectives. The same explanation must be provided to our allies,
who need to be informed as well.

This
education effort must stress the moral dimension of fighting
against terrorism. There should be no confusion about the
difference between freedom fighters and terrorists; yet confusion
on this point not only remains, it abounds. The distinction between
terrorists and freedom fighters may seem self-evident to us, but it
is not clearly understood elsewhere in the world.

The
second element is to reject the sense of inevitability about an
attack on American soil involving a weapon of mass destruction. The
conventional wisdom among many senior law enforcement and
intelligence officials is that it is merely a question of when, not
if. An attack on American soil involving weapons of mass
destruction should not be considered some type of grim passage into
the 21st century. What is needed is a sense of urgency, not
fatalism, about this specter.

The
third element is to restore human intelligence. Our penchant for
technological means has crowded out the development of human
intelligence capabilities. The revitalization of human intelligence
capabilities is long-overdue. Satellite surveillance is wonderful,
but it is no substitute for eyes and ears on the ground to
ascertain enemy intentions. Unfortunately, we have lost that
ability in key regions of the world, and there does not seem to be
any urgency to restore it.

Finally, we need to reinvigorate our
covert capabilities. This presupposes an increase in intelligence
capabilities. To disrupt terrorist groups, we need to get inside
them--and not simply lob cruise missiles at their huts from afar.
This is not easy by any means. It requires time, effort, and
persistence.

All
these measures, if knitted together in a coherent strategy, will
narrow the gap between the Clinton Administration's harsh rhetoric
and the reality of its performance on counterterrorism. The
President's capability of meeting this tall order remains doubtful.
It would be a difficult task even apart from his scandal or
impeachment proceedings.

This
is unfortunate: Left uncorrected, this gap between rhetoric and
reality will engender both derision and cynicism about the ability
of the United States to deal with the threat of terrorism. That, in
turn, may well embolden our adversaries and undermine our
credibility to meet other security obligations. To some extent,
this has happened already with North Korea and Iraq.

IRAQ'S WAR OF NERVES
By James A. Phillips

Today is the 36th day that the United
Nations Special Commission (UNSCOM) has not been able to conduct
inspection missions in Iraq. This should be a great cause for
alarm. After all, Iraqi dictator Saddam Hussein has invaded two
neighbors: Iran and Kuwait. He has launched missiles at four
neighbors: Israel, Saudi Arabia, Iran, and Bahrain. He has worked
clandestinely to build weapons of mass destruction: chemical,
biological, and nuclear. He has used chemical weapons not only
against Iranians, but also against his own people--the Kurdish
minority in northern Iraq. Saddam essentially is a mass killer and
a serial killer who is reaching once again for weapons of mass
destruction.

But
the Clinton Administration sought to downplay concern about the
breakdown of the inspection regime. This complacency is all the
more disturbing given the revelations of former U.S. Marine Corps
Captain Scott Ritter, who, I think, is a man of the highest
personal integrity. Captain Ritter resigned last month from UNSCOM
in protest of the lack of U.S. support for the UNSCOM mission. He
revealed that UNSCOM has detailed information that Iraq has all the
necessary components, except for fissile material, for three
nuclear weapons. He has revealed that Iraq still may be hiding 700
tons of chemical agents. Iraq may have tested biological weapons on
live humans as late as 1995. UNSCOM still believes Iraq has an
operational ballistic missile force of 5 to 12 Al-Hussein missiles
that could be put together and launched on short notice as well the
components necessary for building up to 25 more of these
missiles.

Finally, and perhaps most disturbing,
Ritter has charged that, since November 1997, the Clinton
Administration has interceded with UNSCOM on at least six occasions
to block or postpone inspection activities. Ritter resigned rather
than take part in the charade, saying that the illusion of arms
control is more dangerous than the absence of arms control.

Ritter should be applauded for his
resignation. It is very rare in Washington, D.C., that someone
resigns on a point of principle. But he's been castigated by the
Clinton Administration and called "clueless" by Secretary of State
Madeleine Albright. "Clueless"--despite the fact that Ritter spent
seven years of his life in Iraq looking for these weapons of mass
destruction.

Only
seven months ago, a high-ranking U.S. official during the last
confrontation with Iraq was quoted as saying,

What if Saddam fails to comply and we fail
to act, or we take some ambiguous third route which gives him yet
more opportunities to develop this program of weapons of mass
destruction? Well, he will conclude that the international
community has lost its will. He will then conclude that he can go
right on to do more to rebuild an arsenal of devastating
destruction. And someday, some way, I guarantee you he will use the
arsenal.

Incredibly, that quotation comes from Bill
Clinton himself. But today, his politically convenient sense of
situational ethics has led him to gloss over these disturbing
trends in Iraq. In my judgment, President Clinton is incapable of
coping with the challenges posed by Saddam. This is because the
critical element of dealing with an aggressive dictator is missing
from his policies, and that element is credible deterrence.
Deterrence must be based on a credible threat of military force
and, long before anyone heard of Monica Lewinsky, it was clear that
the Clinton Administration's policy toward Iraq lacked
credibility.

The
causes of the debacle in Iraq are rooted primarily in a series of
mistakes by the Clinton Administration. Iraq's latest provocation
is a consequence of an aggressive dictator's perception of U.S.
weakness. Bill Clinton came into office severely underestimating
Saddam. While campaigning, he proclaimed he was not obsessed with
Iraq, as if part of the problem with U.S. policy was that President
George Bush was personally obsessed. The Clinton Administration
initially softened U.S. policy toward Iraq and dropped Bush's
insistence that Saddam must be ousted before the United States
would agree to lift sanctions against Iraq.

When
Iraq failed in an attempt to assassinate former President Bush in
April 1993 in Kuwait, the Clinton Administration equivocated and
delayed before launching cruise missiles at secret police
headquarters in Baghdad in June. This attack was a mere slap on the
wrist for such a brazen attempt to assassinate a former U.S.
President. The limited size and the symbolic nature of the U.S.
attack--25 Tomahawk cruise missiles at an empty building in the
middle of the night--probably did little to strengthen U.S.
deterrence against Saddam. I would argue that the weak U.S.
response probably encouraged Saddam to contemplate further
challenges to the United States.

More
recently, the Clinton Administration has responded feebly to other
Iraqi provocations. Since 1991, Baghdad has repeatedly blocked the
efforts of UNSCOM inspectors to certify compliance with Iraq's
obligation to dismantle its weapons of mass destruction, but the
Clinton Administration did little but to pass the problem off to a
listless U.N. Security Council. The Clinton Administration has put
Iraq on the back burner while it intervened in strategic backwaters
for humanitarian rather than strategic interests--in such places as
Bosnia, Haiti, and Somalia. In Somalia, it was following up on Bush
Administration policy, but President Clinton greatly expanded that
intervention.

The
United States also severely neglected its close ally in the region,
Turkey. Relations with Turkey are crucial for maintaining support
for the Iraqi opposition. The Clinton Administration also failed to
provide adequate support for that opposition. Iraqi opposition
leaders repeatedly warned the United States in 1996 that the
situation in Iraq was deteriorating, but the Administration was
asleep at the switch and failed to avert growing tensions between
two Kurdish factions that were the major pillars of the Iraqi
opposition.

In
August 1996, Saddam took advantage of Kurdish infighting and
invaded the Kurdish areas. The U.S. reply was another round of
pinprick air strikes that accomplished very little. The current
standoff between the United States and Iraq is the result of the
Clinton Administration's failure to resolve successfully the
situation going back to October 1997, when Saddam sought to block
U.S. personnel from participating in UNSCOM inspection teams. The
Clinton Administration unwisely acquiesced to a questionable plan
by Russia's Foreign Minister, Evgeny Primakov--a long-time personal
friend of Saddam--to provide Saddam with a face-saving escape from
that crisis. Later, the Administration went along with U.N.
Secretary General Kofi Annan's plan, which greatly weakened U.S.
policy and put the focus of decision-making on the U.N. rather than
on Washington.

How
can we get out of this trap? Very briefly, allow me to outline
three suggestions. One is that the United States should be trying
to overthrow Saddam, not just trying to contain him. This implies
coming up with a comprehensive long-term and systematic effort to
unify the Iraqi opposition, giving them the economic, diplomatic,
and possibly military support they may need. It is particularly
important to help to unify the Kurds and help them to work more
closely with Turkey, our most dependable ally that borders Iraq.
The United States should work to cement an alliance between the
opposition forces, help them to broadcast appeals on Radio Free
Iraq, and help them to lobby for international recognition.

Second, we should be prepared to launch
serious military attacks in the next crisis, not just pinprick
symbolic attacks that accomplish little. We should go after the
bases of Saddam's support: his secret police, the Special
Republican Guard, and his various intelligence organizations. These
are also the forces he is using to hide his weapons of mass
destruction. Third, we should retrieve control of U.S. policy in
Iraq from the U.N., where Iraq essentially has veto power because
Baghdad has cultivated support from China, Russia, and France.

In
conclusion, it makes no sense for the United States to pull its
military punches against Saddam in a misguided effort to preserve a
U.N. coalition that will not support military action anyway. Rather
than subcontract our Iraq policy to the U.N., the United States
should seek to protect its national interest through close
cooperation with Iraq's immediate neighbors, particularly Turkey,
Saudi Arabia, Bahrain, Kuwait, Jordan, and even Iran, if Tehran
proves willing. The goal should be to treat the cause and not the
symptoms of the Iraqi challenge--which means removing Saddam from
power, not just containing him.

-- James
A. Phillipsis Director for
Administration of The Kathryn and Shelby Cullom Davis International
Studies Center at The Heritage Foundation.

NORTH KOREA'S MISSILE BLACKMAIL
By Daryl M. Plunk

Four
years ago, North Korea's nuclear weapons development program put
the United States eyeball-to-eyeball with that renegade communist
regime. In Geneva in October 1994, the Clinton Administration
blinked. It signed an agreement with Pyongyang that has showered
North Korea with hundreds of millions of U.S. taxpayer dollars'
worth of food, fuel, and technical assistance. In return, Pyongyang
promised a number of things, including steps toward ending the cold
war in Korea.

At
that time, The Heritage Foundation and many other institutions and
individuals protested that the so-called Agreed Framework deal was
fatally flawed. Still, the Clinton Administration touted the deal
as a major foreign policy success. The deal needed funding from a
skeptical Congress, however. The Administration promoted its policy
through tactics at which it excels--intimidation, not of North
Korea, but of congressional critics. They were told that if the
United States did not fund this process, the North would restart
its nuclear weapons program and perhaps trigger war. And that
burden would rest on the U.S. Congress, the Administration
warned.

In
February 1995, an angry Senator John McCain (R-AZ) called Secretary
of State Warren Christopher's bluff in this regard. During a formal
committee hearing, Senator McCain lamented that if Congress refused
to fund the Clinton Administration's North Korea scheme, any
resulting tensions would be blamed on Hill Republicans. So, he
said, he and his colleagues would wait until the deal's flaws
became obvious to all and collapsed under its own weight. He
predicted that the Clinton Administration would get the blame when
that time came.

I
think Senator McCain's prediction has come true, and the agreement
is on the verge of collapse. North Korea's nuclear facilities are
"frozen," the Clinton Administration stresses, but Pyongyang has
not dismantled any of them and, furthermore, has all major
components of its nuclear program in its possession. Pyongyang has
bomb-grade material hidden from International Atomic Energy Agency
inspection and perhaps has built several nuclear weapons and
assembled several weapons. The Clinton Administration concedes
this.

North Korea explicitly promised in 1994 to
resume productive peace talks with South Korea. It has refused to
do this. The North's armed incursions into the South continue on a
regular basis, sometimes with deadly consequences. Meanwhile,
Pyongyang aggressively markets its Scud missile technology to
various states, including Iran, Pakistan, and Egypt. Last week's
provocative missile shot by North Korea over the skies of Japan was
the last straw in the minds of many in Washington, D.C., I believe.
North Korea poses a deadly threat to South Korea and, in doing so,
poses a grave threat to the 37,000 U.S. troops that are stationed
in South Korea. Pyongyang's recent shot across Japan's bow shows it
is becoming an expanding regional threat. Its missile sales show
that it threatens stability in South Asia and the Middle East.

What
has been the Clinton Administration's response? The North has
become one of the largest recipients of U.S. taxpayer-funded
foreign assistance. Since 1994, the U.S. government has provided
humanitarian, fuel, and technical assistance aid to the North,
valued at about $262 million. I think the Clinton Administration
had hoped this fact would not make it into this presentation, but
it did. Much of this aid came in the wake of North Korea's threats
to back out of the Framework deal. The North has proved itself
extremely skillful at brinkmanship and blackmail. The Clinton
Administration, in response, has stooped to concession and
appeasement.

The
economic, political, and security interests of the United States in
Northeast Asia are very high, as I think we would all agree. If the
North ever makes good on its threat to turn Seoul into a "sea of
flames," the entire region would be destabilized and, of course,
many Americans would die.

The
Clinton Administration's policies have done little more than
paper-over the threat and kick the can down the road. Part of the
Framework deal involves offering a multibillion-dollar, light water
reactor package to the North, a project that would be funded mainly
by South Korea. But, again, Pyongyang has refused to engage in
peace talks with the South and, instead, has pressed for maximum
concessions from the United States. But this is a futile game. The
North's needs are far greater than Washington and Seoul can
fulfill; perhaps that is what Pyongyang has concluded as well.

As
the North continues its slide toward economic collapse, it can
expect only token assistance from the United States and its allies.
The structure of the Geneva deal should be changed. For more than a
year, we at The Heritage Foundation have called on the Clinton
Administration to change the deal and come up with a new package of
incentives that would be tied very specifically to steps toward
reducing tensions. The Administration has failed to move in that
direction. Now Congress is beginning to do that for the
Administration.

This
brings me to the question of President Clinton's scandal and
whether it affects policy. I think it does. The President is not
leading on this policy. Congress is acting for him. Last week,
amendments were passed in the Senate pressing the Clinton
Administration to tie any future aid to North Korean behavior and
actions. Will the President's woes continue to affect policy toward
North Korea? I think so, because it is a very complicated, volatile
situation. In addition, the current policy needs a complete
revamping. We see no strong leadership in the White House or in the
State Department to get us out of this conundrum.

CHINA AND TAIWAN
By Richard D. Fisher, Jr.

Can
President Clinton do his job and save foreign policy? Or perhaps
worse, is he using foreign policy to save his presidency? I would
answer these questions by saying that, since 1996, the Clinton
Administration has made some real mistakes. And, in 1998, it
certainly did try to use the U.S.-China summit in June to try to
bolster sagging domestic fortunes. This is not a headline. All
Presidents try to use summits to help their domestic political
standing, but it is curious and significant to note that, when the
summit was being first planned early this year, it was projected
for after the November election. Instead, the summit was moved up
to the summer. At the time this decision was made, the
Administration was facing the possibility of a summer lawsuit from
Paula Jones. There is speculation is that the Administration agreed
to move the summit up in order to counter the expected negative
publicity of a lawsuit.

The
Clinton Administration has made two major mistakes in its China
policy. And taking a cue from the Chinese zodiac, I would call 1998
the year of the two blunders. The first blunder, during the course
of the summit, was an explicit limitation of U.S. support for
Taiwan, which was at variance with all previous U.S. policy on
Taiwan. The second blunder is the notion promoted by the
Administration that the democratic United States can somehow be a
strategic partner of still-communist China.

These blunders can trace their policy
route to 1996, when the Clinton White House took direct control of
China policy formulation and began a new course. This course was
sparked by its fears over the near-possibility of a conflict or war
with China during the confrontation over Taiwan in early 1996. In
1995 and 1996, as you'll remember, China launched missiles near
Taiwan to protest or oppose what it viewed as independence
activism, which could lead to a declaration of independence by
Taiwan. China has said this would be cause for war.

At
that time, Taiwan's President, Lee Teng-hui, was not campaigning
for explicit independence. Taiwan had become a democracy. There was
a real debate in Taiwan, and there still is an ongoing debate, over
the future of relations with the mainland. As more and more
Taiwanese look at the mainland, they do not find the prospect of a
forced political union with the mainland very appealing; so it is
to be expected that this would be a controversial issue there.

But
I fear that in 1996 the Administration drew a flawed lesson on
which it has based subsequent policy: that Taiwan was more to blame
for the crisis in 1996 and that China subsequently was placated in
order to prevent future military confrontations. In 1996, the
United States sent two carrier battle groups to deter Chinese
military action. But by 1998, U.S. policy toward Taiwan had become
the bully on the Taiwan Strait that was having more impact than the
targets of the Chinese missiles.

The
principal policy change that probably emerged in 1996, but that did
not become explicit until the October summit last year, was what
has since been called the "Three No's": The United States will not
support independence for Taiwan; it will not support a "one-Taiwan,
one-China" formulation; and it will not support membership for
Taiwan in international organizations for which statehood is a
requirement.

These were first stated by a low-level
State Department spokesman. But that was not enough. In April,
Secretary of State Madeleine Albright stated them again. Still,
that was not enough. When President Clinton went to Shanghai during
his recent visit to China, there was a staged event so that the
President himself could repeat the Three No's. And what did he get
for this concession? Any promise not to attack Taiwan? No. The only
thing that I can determine the President really gained was some air
time in Chinese broadcasting. And while he said many useful things,
I don't think his words will have any real lasting impact.

And
what did China gain? First, it put the U.S. President on record as
not supporting independence for the people of Taiwan. Since the
beginning of U.S. relations with China in the Nixon Administration,
the United States has been studiously agnostic, avoiding any words
that would prejudge the ultimate fate of Taiwan. There was no
mention of independence and no advice on unification. All that we
said is that we want this process to be resolved peacefully. The
Clinton Administration for the first time created a clarification
in U.S. policy that denies U.S. support for something on Taiwan;
and that "something" is independence. I am not in favor of starting
a war in the Taiwan Strait, but why did President Clinton have to
betray American principles to satisfy China? Would Thomas Jefferson
approve of William Jefferson Clinton's decision not to support the
option of self-determination for the people on Taiwan?

The
other policy blunder of 1998 is this notion that we can somehow
create a strategic partnership with China. When I think of
strategic partners, I think of our democratic allies like Japan or
Britain, or even a country with which we are not allied but with
which we have extensive cooperative arrangements, like Singapore.
Does China match any of these?

In
military terms, it appears that the Administration hopes that, by
engaging the People's Liberation Army (PLA) extensively, someday
the PLA will decide to become our friend. I don't think this is
going to happen any time soon. In the meantime, we have given the
PLA access to high-level technology: attack submarines, stealth
fighters, and command-and-control centers. And we have received
nothing in terms of equivalent access to the PLA.

I
think there is a good chance U.S. and Chinese interests will clash
on the Korean Peninsula and in the Taiwan Strait. As the PLA
increases its strength and succeeds in modernization, there will be
greater temptation to use force, which may cause direct conflict
with the United States. Although there is no immediate war-causing
crisis on the Taiwan Strait that would confront President Clinton
during his current weakened state, I would submit that weakness in
his presidency this year probably contributed to his decision to
trade high-profile headlines in China for limitations on the extent
of U.S. support for Taiwan. This was an awful precedent to set: It
was a betrayal of our principles, it was the wrong message to send
to a new democracy on Taiwan, and it will force us to intervene
more frequently in Taiwan events as both sides ask us to define the
term "independence." If there is a future crisis, I think that the
Administration will probably make further concessions, perhaps
limiting future U.S. arms sales to Taiwan.

In
short, while President Clinton indeed purchased some headlines in
China this year with his "Three No's" statements, I think he has
created much more trouble for the United States in the future.

--Richard D. Fisher,
Jr., is former Director of the Asian Studies Center at The
Heritage Foundation.